The MP who called for the London School of Economics' links with the Libyan regime to be investigated said the university had "lost its moral compass".

A new report into LSE's conduct over donations from Libya says the contacts carried "a significant degree of risk", which would never have been exposed had former dictator Colonel Gaddafi not been toppled.

Conservative MP Robert Halfon, who led the charge against the university, called it "one of the most disgraceful episodes in academic history. Senior individuals who courted the Gaddafis should seriously consider resigning. They know who they are."

Published this week, former Lord Chief Justice Lord Woolf's independent inquiry into failings at the university, found LSE's reputation had been "seriously damaged" by the association.

Lord Woolf noted that the university had become known as the "Libyan School of Economics" and declared that the media onslaught after the Gaddafi regime collapsed had "caused significant distress to staff, students and academics at the LSE."

LSE's director Sir Howard Davies resigned in March over an intended gift of £1.5m from the foundation belonging to Colonel Gaddafi's son Saif, a former PhD student at the school.

Mr Halfon's grandfather was a Libyan Jew forced to abandon his home in Tripoli after antisemitic pogroms in the 1960s. He said: "I don't think there has been nearly enough self-reflection. The university lost its moral compass in a quest for money.

"Many other universities have accepted money from dictators in the Middle East, and need to do the same soul-searching, and make sure it never happens again."

In his report, Lord Woolf made 15 recommendations, which the School has agreed to implement. They include a new code of ethics, guidance on outside assistance a postgraduate can receive, and a new donations policy.

Lord Woolf found that the decision to receive a gift agreement from Mr Gaddafi, on the same day as his graduation ceremony at the university, was "indicative of a naivety at the LSE about the ease with which institutional reputations are damaged.

"The timing of the two events was unhappy. It could result in a misconception that the gift was a quid pro quo for the doctorate."

Separately, the University of London investigated allegations of plagiarism in his PhD by Saif Gaddafi, but it has decided, for reasons which will not be made public, not to revoke his doctorate.

Although Lord Woolf concluded there was not "any one individual at the LSE who was aware of the full extent of the LSE's involvement in Libya" because "it had grown like Topsy", he concluded that "responsibility for what went wrong must rest with the director [Sir Howard Davies ]".

Professor Judith Rees, now the director of LSE, said: "The publication of this report will help LSE move on from this unhappy chapter in its otherwise celebrated history.

"It is consoling that Lord Woolf finds that no academic or other staff member at LSE acted other than in what they perceived to be the best interests of the School."

Lord Woolf found that it was LSE professor of political science David Held, who has since resigned, who "first approached Saif" about the possibility of funding.